U.K.’s Tech Tax Is Both Pointless and Essential

(Bloomberg Opinion) -- Britain's Chancellor of the Exchequer Philip Hammond has, unexpectedly, forged ahead with plans to introduce a tax on the world’s biggest tech firms. Call it political grandstanding (it is). Call the proceeds insubstantial (they will be). But the levy, announced in Monday’s budget, will be an important step toward ensuring that the technology industry is taxed effectively.

The tax, to be introduced in April 2020, will apply to digital services offered by tech companies with revenue of least 500 million pounds ($640 million) a year – in short, the likes of Facebook and Google. Importantly, the government said it will scrap the levy if an appropriate international accord is reached.

It has been clear for some time that the system hasn't kept pace with the way many of the biggest companies in the world make their money. Tech firms have been able to allocate where they book profits in the most tax-advantageous way, depriving governments of billions of pounds of revenue.

The taxation of capital goods is straightforward: the place where the item is purchased is where the value is created for the owner. Facebook or Google might argue that, in their case, the value is in their intellectual property, largely generated in California. But what is in fact monetized is the user's interaction with their platforms. It therefore follows that the user's location is where the tax should be paid.

Hammond’s measure, which won’t target the sale of goods online, will impose a 2 percent on the revenue generated from U.K. users of search engines, social networks and online marketplaces.

The Organization for Economic Cooperation and Development has been working on the issue for five years – but the fruits of its effort are unlikely to be borne before 2020, when it promises to deliver a final report. Implementing any proposals will likely take several more years.

There's also no guarantee that governments will adopt the OECD's proposals. At the moment, big tech firms pay very little tax in some countries and more in others: redistributing that burden will mean that some countries will lose out, and their governments are understandably reluctant to agree to a change.

A multilateral solution would, of course, be better: a scatter-gun approach by individual countries could mean companies are taxed on the same income twice. The plan Hammond announced on Monday will raise only 400 million pounds, a rounding error in the national accounts.

But if his unilateral action sends Silicon Valley’s lobbyists scurrying to Capitol Hill, demanding an urgent international accord so that there’s consistency in the global system, then so much for the better.

Efforts to implement a pan-European solution have so far failed, partly because Germany has serious reservations about taxing data. Nevertheless, Italy and Spain are pressing ahead with such taxes on their own. It goes without saying that there’s staunch opposition from the U.S.

The British proposal is therefore important: though the levy generates little additional tax revenue, it should spur other governments and the industry to reach a global agreement sooner.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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